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mastercard: going upscale

check, cash, or credit card? how many times have you heard that question and replied “credit
card” without even thinking about it? when you do think about it, however, credit cards are a
relatively new phenomenon. yet when it comes time to pay, it seems we’re more likely to use the
credit card (and to have several of them) than checks or cash. indeed, some writers have even
suggested that, in the not so distant future, we will all operate with “plastic money” all the time.

mastercard had its beginnings in 1966, when a group of banks joined together to form the
interbank card association (ica). the ica was founded by an association of banks rather than by a
single dominant bank. member committees ran the association by establishing rules for
authorization, clearing, and settlement as well as marketing, security, and legal matters. in 1968,
ica went “global” by forming an association with banco nacional in mexico and later with eurocard
in europe. since then, mastercard has expanded around the world—even into the communist
world of the 1980s when it entered the people’s republic of china in 1987 and russia in 1988. by
1993, china was the second largest country in terms of mastercard sales volume. today,
mastercard is affiliated with more than 23,000 financial institutions around the world and has nearly
370 million credit and debit cards in use . these cards are accepted at more than 13 million
locations worldwide. gross dollar volume in 1995 was almost $500 billion. at present, mastercard
offers several global products, including maestro (the world’s first truly online debit program) and
cirrus (the world’s largest atm network). wherever you are, you can use your mastercard to pay for
goods and services, obtain cash, or debit your checking account directly.

mastercard faces fierce competition from systems such as visa and american express, so selling
370 million credit cards requires a lot of ingenuity in finding prospects. to keep ahead of the
competition, mastercard constantly seeks new segments and fashions new product offerings. one
segment that mastercard has targeted with a vengeance is the health care market. to be
successful in this market, mastercard must convince doctors, dentists, and other medical
practitioners to accept credit cards. for decades, medical practitioners have complained of
difficulties in collecting payments for their services. few doctors actually want to initiate legal
proceedings against nonpayers, so credit cards should have a strong value for them. with such
cards, the credit card company takes care of collections. of course, the doctor must pay
transaction fees, but these may well be less than the costs associated with fee collections.

there are other reasons why medical practitioners might be interested in accepting credit cards.
many doctors demand immediate payment, which can be difficult for patients when cash flow is
tight. in such situations, credit cards are a useful option. a survey by mastercard found that many
would-be patients postpone both routine and emergency visits to the doctor because of financial
problems. most medical practitioners realize, however, that early detection of problems will likely
lead to faster and perhaps less expensive “cures.” so, the failure of patients to come to the doctor
when symptoms first strike often makes the doctor’s job more difficult later on. finally, mastercard
might be especially attractive to medicare patients needing a medical procedure not covered by
medicare—the patient can still receive treatment even if it means spreading payments out over
time. for the patient, mastercard offers more than just a payment mechanism. it also provides a
free health care guide and planning kit, which enables consumers to track previous medical
expenditures and plan for future ones. mastercard offers lots of health-related tips, and its website
links cardholders to different types of health care associations. mastercard holders also receive
coupons with savings of up to 60 percent on health and fitness products such as nordictrack, jenny
craig, pearle vision, xenejenex health videos, and solgar vitamins and herbs. in addition,
mastercard has ties with services such as smokenders, the nutrition action healthletter, the
american running & fitness association, and the american medical association.
one of the newest mastercard health products is a joint offering with mellon bank corporation.
these two companies provide a package of depository, payment, and processing services for
medical savings accounts (msas). included in the package is a mastercard mastermoney debit
card that allows holders to pay for msa-related medical expenses. msas are health plans that
combine money-saving, higher-deductible healthcare polices and tax-deferred savings accounts
for the self-employed or for people working for companies with 50 or fewer employees. in an msa
system, employers buy high-deductible health insurance policies coupled with tax-deferred medical
savings accounts. employees make pre-tax contributions to their accounts, which can then be
used through the mastermoney debit card to pay for medical care. such plans enable employees
of participating companies to pay healthcare providers directly for services, quickly and easily.

another market that mastercard targets is the sports enthusiast. to reach sports markets
worldwide, mastercard has sponsored world cup soccer. one of its newest ventures is the jordan
grand prix formula one team sponsorship. mastercard sponsors the b&h jordan mugen-honda
formula one team worldwide, and announced expansion of this sponsorship in january 1998.
“expansion of the jordan grand prix formula one team racing sponsorship provides mastercard with
all the key elements of a successful program: a global sport with a year-round calendar of races
and events, a high-performance, competitive team, famous personalities, and countless loyal and
passionate fans,” says mava heffler, senior vice president of global promotions and sponsorships
for mastercard. she continues, “sports sponsorships are among the most powerful tools
mastercard has to effectively build our brand and our business.” mastercard can tap into the vast
emotional affinity that racing fans have for formula one through jordan mastercards, jordan team
licensed merchandise, and cardholder promotions such as the opportunity to drive a jordan car.

there’s another reason why mastercard wants to expand its sports sponsorships to formula one
racing. whereas stockcar racing is the darling of the masses of the u.s. population, formula one
racing attracts many well-heeled fans. after decades of building volume by attracting millions of
credit-hungry consumers, mastercard decided recently to go after a different target—the affluent.
although providing credit to the rich might seem like a contradiction (you might think that the
affluent don’t need credit), the affluent are actually a good target for a credit card company. one of
the major benefits of a credit card system is the ability to pay when cash and check would be
unacceptable or difficult. the rich need this benefit as much as others—perhaps more.

traditionally, however, you might think of a credit card system as making money from people who
incur high interest charges on outstanding balances carried from month to month. so, how could
mastercard improve its revenues by catering to the wealthy, who pay their credit card bills on time?
the answer is the 1 to 2 percent interchange fee that credit card companies receive on each
transaction made by these big spenders. according to michael auriemma, a credit card consultant,
the average card user charges $3,000 a year, resulting in interchange fees of $42. assuming 80
percent of card users carry a balance, averaging $1,800 each, he estimates that a customer
paying 16 percent interest would accrue $230 in annual interest charges. by contrast, a wealthy
card user may charge $20,000 a year, meaning that, even without interest charges, the bank will
earn $280 in interchange fees, in addition to annual fees paid for the cards.

to attract these consumers, mastercard will provide elite cards offering special perks, from 24-hour-
a-day concierge services—running errands, arranging travel, booking tickets, and the like—to vip
treatment at concerts and sporting events. bankamerica corp has become the first credit card
issuer to launch a world mastercard. like cards from rival american express, the world mastercard
will charge a higher annual fee, which is $75. not to be outdone, visa is working on a comparable
card.
targeting the wealthy has another benefit for mastercard. many of the millions of mastercard
holders are mired in debt and are failing to pay their credit balances, which results in losses for the
banks in the mastercard system. furthermore, the ready availability of credit cards from numerous
banks has conditioned consumers to shop for no fee and low fee cards—the best rates and
rewards programs. these are actions that further reduce the revenue to mastercard banks. by
targeting the wealthy, mastercard reduces its reliance on more debt-ridden, less loyal consumers.
however, in targeting this upscale market, mastercard pits itself directly against american express.
is amex worried? gail wasserman, an american express spokesperson, claims that amex is not
overly concerned. “history has shown that visa and mastercard have often come out with cheap
imitations of american express products. they never are quite as good as ours.”

some industry observers remain skeptical that mastercard can succeed with this venture. “no
issuer in the world has committed itself to the same level of customer service that american
express has,” says david robertson, president of the nilson report, a credit-card research firm in
california. he adds, “the crux of the matter is visa and mastercard can’t control their member
banks; and since the members have that flexibility, no matter what the product, it’ll be a variation of
gold and platinum. ultimately, it’ll all become middlebrow.” his comments raise another issue. so
many member banks have issued gold and platinum mastercards that the image, value, and status
of such cards have been tarnished in the minds of americans. in contrast, since its introduction in
1984, the american express platinum card has dominated the market for very affluent card holders.
amex charges an annual fee of $300 and offers perks such as free upgrades at leading hotels and
free companion tickets for customers buying a first- or business-class international ticket on
selected airlines. there are only 300,000 to 400,000 platinum amex cardholders, compared to the
millions of mastercard platinum cardholders. it stands to reason that, if necessary, amex will
defend its market fiercely and aggressively. and amex has experience in serving this market,
whereas mastercard does not.

questions for discussion


1. what segmentation criteria has mastercard used in the healthcare, sports, and affluent
market segments? what segmentation criteria are implicit in mastercard’s selection of
these segments?
2. how does mastercard differentiate its offerings for each of these target segments? how has
mastercard positioned its offerings?
3. what competitive advantages and disadvantages does mastercard have with its world
mastercard, targeted to the affluent?
4. in your opinion, will mastercard’s world card be a success? why or why not? what
recommendations would you make for marketing the card?
references: kristie perry dolan, “getting patients to pay,” medical economics, pp. 48-62; stephen e. frank,
“burned by the masses, cards court the elite,” wall street journal, november 5, 1997, p. b1; and the following
mastercard press releases and other information found at the mastercard web site, february 1998: “mellon
and mastercard introduce breakthrough debit product as key to accessing medical savings accounts;” and
“mastercard expands popular jordan grand prix formula one team sponsorship into global program.”